|McDonald's (NYSE: MCD) is the world's largest chain of fast food restaurants, serving nearly 47 million customers daily.
McDonald's primarily sells hamburgers, cheeseburgers, chicken products, French fries, breakfast items, soft drinks,
milkshakes and desserts. More recently, it has begun to offer salads, wraps and fruit. Many McDonald's restaurants have
included a playground for children and advertising geared toward children, and some have been redesigned in a more 'natural'
style, with a particular emphasis on comfort: introducing lounge areas and fireplaces, and eliminating hard plastic chairs and
In addition to its signature restaurant chain, McDonald’s Corporation holds minority interest in Pret A Manger (a UK-based
sandwich retailer), and owned the Chipotle Mexican Grill until 2006 and the restaurant chain Boston Market until 2007. The
company has also expanded the McDonald's menu in recent decades to include alternative meal options like salads and snack
wraps in order to capitalize on growing consumer interest in health and wellness, and to avoid the "veto vote" where one
member of a group might refuse to go because there are not enough healthy options on the menu.
Each McDonald's restaurant is operated by a franchisee, an affiliate, or the corporation itself. The corporations' revenues come
from the rent, royalties and fees paid by the franchisees, as well as sales in company-operated restaurants. McDonald's
revenues grew 27% over the three years ending in 2007 to $22.8 billion, and 9% growth in operating income to $3.9 billion.
Fast Food Profits Threatened by High Food Prices, McDonald's First Victim
July 24, 2008
International business--and currencies--lifted McDonald's in the
second quarter, but ballooning commodity costs threaten to chomp
into future profits.
According to RBC Capital Markets analyst Larry Miller, the weak U.S.
dollar tacked on about 10.0% to earnings. Although the top and
bottom lines were bloated by the currency rate, Miller stipulated that
the business was solid.
"Comparables are holding up, and not too many people can say
that," Miller said. For the quarter, McDonald's (NYSE: MCD)
same-store sales increased 6.1%, below the 7.4% reported last
In Europe, same-store sales jumped 7.4% and 8.8% in the
Asia/Pacific, Middle East and Africa division. In the U.S., however,
same-store sales rose only 3.4%.
For all the quarter's strength, dark commodity clouds rest on the fast
food chain's horizon. "It looks like commodities are going to be a lot
higher than forecast, with beef costs in particular creeping up," Miller
Last May, the company vowed to keep its dollar menu intact despite
soaring raw material costs (See " Dollar Still Strong At McDonald's")
but during Wednesday's conference call, President Ralph Alvarez
warned that next year's dollar menu will look different from the
current one, which features hearty fare like double cheeseburgers
and chicken sandwiches.
"In this current environment, we've got to make sure we're pricing
smart, not just pricing low," Alvarez said.
McDonald's expects U.S. beef costs to be up 8.0% to 9.0% in 2008,
with chicken costs rising about 5.0% to 6.0%. In Europe, the
company expects beef costs to jump 8.0% to 9.0%, while chicken
costs are expected to increase about 7.0% to 8.0%.
"The more franchisees get pinched, the more they will hold back on
programs going forward," Miller said. "There are major capital
investments they have to undertake, and [the extent] they're earning
less money will affect how aggressively they will [make] those
Shares of the Oak Brook, Ill.-based company dropped 0.8%, or 46
cents, to close at $59.66.
For the quarter, the company posted $6.1 billion in sales, 5.2%
above the $5.8 billion reported in last year's corresponding quarter.
McDonald's' $1.2 billion, or $1.04 per share, in earnings were an
inversion of last year's $771.7 million, or 60 cent per share, loss.
Excluding a 10 cent gain from the sale of its stake in sandwich
chain Pret A Manager, it earned 94 cents per share.
The results were ahead of Wall Street's predicted $5.9 billion in
sales with earnings of only $982.9 million, or 86 cents per share.